# An asset that was purchased 2 years ago was expected to be kept in service for its projected life of 5 years, but a new version (the challenger) of this asset promises to be more efficient and have lower operating costs. You have been asked to figure out if it would be more economically attractive to replace the defender now

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An asset that was purchased 2 years ago was expected to be kept in service for its projected life of 5 years, but a new version (the challenger) of this asset promises to be more efficient and have lower operating costs. You have been asked to figure out if it would be more economically attractive to replace the defender now or keep it for 3 more years as originally planned. The defender had a first cost of \$300,000, but its market value now is only \$150,000. It has operating expenses of \$120,000 per year and no estimated salvage value after 3 more years. To simplify calculations for this problem only, assume that SL depreciation was charged at \$60,000 per year and that it will continue at that rate for the next 3 years. The challenger will cost \$420,000, will have no salvage value after its 3-year life, will have chargeable expenses of \$30,000 per year, and will be depreciated at \$140,000 per year (again, using SL depreciation for simplicity in this case). Assume the company's effective tax rate is 35%, and its after-tax MARR is 15% per year.

(a) Determine the CFAT in year 0 for the challenger and defender.

(b) Determine the CFAT in years 1 through 3 for the challenger and defender.

(c) Conduct an AW evaluation to determine if the defender should be kept for 3 more years or replaced now.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
Related Book For

## Engineering economy

7th Edition

Authors: Leland Blank, Anthony Tarquin

ISBN: 978-0073376301